I'm not predicting a crash — I just think the odds of
this happening in the next couple of years are higher than usual
(logic
here).

More importantly, I think the odds are very high that, even if
the market doesn't crash, stocks will return far less over the
next decade than the double-digit percentages they have returned
in the past four years.

In light of that view, several readers have asked why I am not
selling my stocks or even going short (betting on a crash).

After all, if I think there's a "decent chance" of a 30%+ crash
in the next year or two, wouldn't this be a wonderful opportunity
to make (or at least save) some money?

That's a perfectly reasonable question.

Here's why I'm not selling my stocks or going short the stock
market:

* My portfolio is already well
diversified. My savings are composed primarily of
low-cost index funds holding stocks, bonds, cash, and
real-estate. If the stock market collapsed, this diversification
would cushion the blow. It would also (I hope) keep me from
panicking and selling near the bottom. (This is a real risk, one
I occasionally succumbed to early in my investing career.) I also
have enough of my portfolio in cash that, if the market does
crash, I'll be able to rebalance into stocks at a much lower
level.

* I never invest money in the stock market that I need to
use in the next 10 years. The stock market does crash
occasionally. And the last thing you want is to have to sell your
stocks during the period when the market is "crashed." If the
stock market crashes permanently, or we get in a
Japan-type situation in which stocks remain clobbered for
decades, then, yes, I'll be bummed I didn't sell some now. But
otherwise I expect any crash to be relatively temporary, just as
the crash of 2008-2009 was.

* The outlook for other asset classes over the next 10
years is no more attractive than it is for stocks (and, in some
possible scenarios, it is worse). If interest rates rise
back to normal levels, bonds will get obliterated. Cash is
earning nothing. Real-estate is also expensive by many measures.
So the last thing I want to do is leap from the pot into the
fire.

* There seems a reasonable likelihood that inflation will
accelerate at some point over the next decade, and stocks are a
good hedge against inflation. Unlike bonds and cash,
stocks are "real" assets. They represent an ownership share in an
enterprise whose business will adjust to inflation by raising the
nominal level of prices, wages, and profits. Stocks don't
necessarily do well in high-inflation environments (stocks were
flat in nominal terms from 1966-1982 and dropped considerably
after adjusting for inflation). But they do better than bonds,
which get demolished.

* Just because I think there's a "decent chance" of a
market crash doesn't mean I am highly confident there
will be one. I am never highly confident of any
short-term market behavior. And I would suggest that anyone who
is highly confident about short-term market behavior
either doesn't have much market experience or is deluding
themselves. I am reasonably confident that stock returns
will be crappy for the next decade — because all the valid
valuation measures I know of suggest that they will. But
sometimes things change fundamentally and the old rules no longer
apply. And it's certainly possible that it's "different this
time." (That, by the way, is why I'm not 100% confident
that returns will be crappy. If you ever meet someone who
knows what the market is going to do, please send
them my way. I always assumed this person existed, and I spent my
decade on Wall Street looking for him/her, but I never found
him/her.)

* I have learned the hard way that market timing is very
difficult and is generally a terrible idea. It is really
hard to correctly "time" major market reversals. (I learned this
as an analyst during the dotcom crash in 2000, and my mistake
cost me and my clients a fortune.) And it is really,
really hard to correctly time two major market reversals
in a row, which is what I would have to do for it to be a smart
idea for me to dump my stocks now. Specifically, if I sell now,
and the stock market does, in fact, drop 30%+ from this level in
the next couple of years, I will then have to figure out the
right moment to get back in. (Given inflation, remaining on the
sidelines forever would be a disaster.) If the market drops, say,
25%, it will be because things look so terrible that it will look
like the market is going to drop another 25%. And who wants to
buy only to have the market crash another 25%? If I set a hard
"buy" floor at 30%, meanwhile, the market will no doubt drop
28.8% and then skyrocket, leaving me alone at the station as it
rolls away.

* The market might not crash. Instead of
crashing over the next year or two, the market might rise another
10%-30%-50%-100% and then correct the "imbalance" by parking in
place for 10-20 years. It will be psychologically very difficult
for me to buy back in at a higher level after selling here,
especially if I am still worried about a crash. (And if I wait to
buy in until I am NOT worried about a crash, I'll be waiting for
Godot.)

* If I sell now, I'll have to pay taxes. Thanks
to my indexing strategy, I have captured every point of the move
up from the 2009 market low. When markets crash, I also buy more
of them, so I was lucky enough to get some new stock in 2008 and
2009 at much lower levels than today. So if I sell now, I'll have
some capital gains taxes to pay. (I did, stupidly, "rebalance"
out of some stocks in 2011 or so, in part because I persuaded
myself that we were experiencing a sort of sucker's rally. That
dumb-ass move has cost me money between then and now and
reaffirmed my conviction that market timing is idiotic. But, on
the bright side, I have fewer embedded capital gains taxes to
pay.)

* Oddly, the best thing that could happen for my
long-term stock returns would be for the market to crash 50% and
then stay crashed for 5-7 years. I reinvest dividends.
So if the market drops by, say, 50% over the next year, and then
stays at, say, DOW 7,500 for 5-7 years, I will get to reinvest
5-7 years worth of dividends at half the price per share than I
am paying today. This will result in my accumulating twice as
many new shares over the next 5-7 years as I will if stocks stay
where they currently are. Then, 5-7 years from now, when the
stock market finally begins to recover, these new shares will act
as a sort of portfolio turbocharger, boosting my returns.

In short, the only thing I am really worried about as a
stock-market investor is a permanent crash. And if the
stock market crashes permanently, it will likely be
because the United States has experienced a communist revolution
in which all private assets are seized or some other cataclysm.
And if that happens, I'm going to have bigger things to worry
about than my stock portfolio ...